What would you do?

Discussion in 'Investment Strategy' started by LisaSimpson, 19th Dec, 2018.

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  1. LisaSimpson

    LisaSimpson Member

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    Hi All

    Long term lurker, first time poster :) Just would like to know if any of the highly knowledgeable people in this forum have any opinions/advice on our current situation.

    We are a couple in Perth in our (very) late thirties with one young child and definitely no more children planned!

    Total household income from work 200k ++ (depending on overtime/bonuses etc) before tax.

    PPOR owned outright (fully offset). Would assume to be worth approx 900k in current market. Generally happy with it although a bigger backyard would be nice (would cost approx 1.2k in our chosen areas)

    IP1: 4x1 older house in middle ring suburb on large block. Upcoming proposed zoning changes should hopefully make subdividable. Prob worth about 350k currently. Owe approx 90k. Gets 300pw rent

    IP2: 1x1 unit inner city unit. Not in a high rise, in small complex and very unique. Rents quickly at right price, currently 380pw. Prob worth approx 500k which is approx what we paid. Owe approx 350k.

    Shares: we have approx 400k in diversified direct Australian shares. We would really like to build up enough so that when our son reaches high school the dividends pay his private school fees.

    So what would you do in our situation? Sell one of the properties? We are currently accumulating shares in preference to paying off the IPs due to goal stated above. They both turn I and O next year. We will cover the payments fine but there’s an opportunity cost.

    Thanks in advance :)
     
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  2. Bonz

    Bonz Well-Known Member

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    Doesn’t sound as though your doing much wrong. Kick back and enjoy Xmas.
     
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  3. euro73

    euro73 Well-Known Member Business Member

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    So no mortgage on PPOR
    200K ++ income
    INV #1 generating a 15.6K rent per annum before costs , which will be @ 4-5 K running costs and @ 5-6K for 90K P&I over 25 years, meaning it should generate 5-6K surplus even when it goes P&I
    INV #2 will run negative under P&I, as it generates @19.8K rent against 5-6K costs and @22.8K for 350K P&I. You can offset that pre tax loss of @ 8-9K with the 4-5K surplus from INV #1 so essentially , your properties almost run themselves and only require you to tip in @ 4K per annum from your 200K ++ salaries.......

    Within a few years, as the principle starts to reduce, the situation will become neutral... and thereafter you will be CF+ even while paying P&I .

    So I think you have the luxury of being able to continue to invest in real estate if you choose, and to continue to invest in your share portfolio at the same time. There is enough income available to do both . It doesn't need to be one or the other. And keep in mind, the share market isn't exactly going great guns at the moment , and most pundits think 2019 will be rough as well because of the sugar effect of Trumps tax cuts wearing off, fed rate hikes and the US china tit for tat tarriff shenanigans.( but really, who ever gets share market predictions right ? ) ... so maintaining diversification between both asset classes might not be a bad idea...

    You also have a third option - the option to contribute a lot more to Super and start really building that income pool ... but thats a discussion you should have with your planner.

    Point is - with no PPOR debt and that income , you can do all three things if you wish.
     
  4. Trainee

    Trainee Well-Known Member

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    You have no ppor payments, good income and a decent portfolio. You should be planning for early retirement, not just school fees. Really two main paths: save and add to the share portfolio, or look to leverage more into another property for exemple. You need to decide based on your risk appetite.
     
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  5. Scott No Mates

    Scott No Mates Well-Known Member

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    Seems like there is on plan at this stage (unless I've missed something).

    Probably time to sit down with a FP to set some goals.
     
  6. albanga

    albanga Well-Known Member

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    Not sure on this option.
    Still in their 30s with nearly 1.5mil in assets.
    No one IMO should be investing into super in that position. They should be squarely fixed on early retirement, not waiting until 70. Just my 2 cents
     
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  7. albanga

    albanga Well-Known Member

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    As for OP. 1 child with no plans for more than I think you can definitely forego the backyard. Most people are doing small backyards these days with 3 kids. I don’t see the value in selling costs, re-entry costs and 300k more for a bigger backyard.

    I’m just curious as to why not property? It clearly has been very kind to you.
    I understand your reason for dividends but the same thing can be achieved either via CF+ rental income (admittedly hard in short space unless employing a strategy that someone like @euro73 couke help with) or capital growth in which you could sell down when the time comes.
     
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Owned outright and fully offset are not the same thing.

    What are the interest rates on your loans and is the ownership the same person on all?
     
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  9. willair

    willair Well-Known Member Premium Member

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    Buy the sounds of things you are already in the middle ground investment wise.. I would not sell anything ,as the common perception most undervalued ASX top 20 companies are no different from property investment time wise..

    Just look into the 400k in asx listed ,most of those companies within that portfolio would carry a 75% investment margin borrowing against the value of the portfolio ..imho..
     
  10. Stoffo

    Stoffo Well-Known Member

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    Welcome Lisa
    Your family is doing quite well, congrats.
    Thinking and planning ahead is a great idea, just remember the old quote about the best laid plans......
    Only one child with NO more children PLANNED......, I hate to break it to you but it would appear that "most children" aren't planned these days (for example, 16 months ago we were gifted a grandaughter in our mid 40s)
    So, hope for the best, plan for the worst !
    In your position I'd spread my risk, (you are still in accumulation phase) so would be looking for another IP before Perth picks up much more, put some into shares early 2qtr, and sacrifice into super with what if any is left over to take advantage of tax concessions.
     
  11. LisaSimpson

    LisaSimpson Member

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    Thank you all for replying
    Good point; I didn’t phrase that correctly. It is fully offset so there is technically still a loan but as is IO we have no repayments. We need to decide before mid next year (when goes P and I) whether we are going to pay it out or use the offset money for ?new PPOR as discussed.

    PPOR loan in both names.
    IP1 in my name , IR 4.78% as IO. I am lower income earner; work part time
    IP2 in husband name IR 4.80%

    Excuse my ignorance but could you please put that in layman terms? ;)
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    whats the rate on the PPOR loan?
     
  13. LisaSimpson

    LisaSimpson Member

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    Well my husband is of the same opinion as you re the backyard particularly as we have an oval across the road; he’d prefer concentrate on building investments.

    Re why not property, well yes we did well from the big Perth boom (husband bought a place before boom which we sold during boom for lots more; I bought IP1 just after start of the boom) but we feel a bit wary as our rents have decreased heaps with the downturn and IP2 is worth about the same as I paid for it (I fell in love with it and bought it as PPOR before husband and I moved in together
     
  14. bobbyj

    bobbyj Well-Known Member

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    Congrats @LisaSimpson
    I think you've done extremely well. That's a great financial position to be in in your 30s.

    It looks like you're in a very good cashflow position. Your properties would have to be cashflow positive and your share portfolio should be bringing in at least $16,000 (not including franking credits).

    I think selling the properties would incur capital gains tax and agents fees etc.
    If you're both not intending on leaving work anytime soon, you could continue to accumulate shares.

    There are of course, risks with the market (locally and internationally) with a possibly overvalued market that may go through a prolonged period of dropping prices.
    If your properties are in Perth, the house should see some gains over the next few years (depending on where it's located). The unit should see rent plateau and increase gradually, but the value may go sideways.

    If I was in your position, I'd just go with dollar cost averaging into the market via ETF/LICs.
    I'd just sit on the properties for long term provided you both intend on working for a while longer.

    Personally, I don't intend on putting any money into my super as I'm far away from retirement.

    Not advice.
     
  15. LisaSimpson

    LisaSimpson Member

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    Thanks all for your valuable replies and apologies for the late reply; was taking some time away from the net over the festive season! Happy New Year!

    @Terry_w I must admit I had to look this up as at the current moment it doesn’t have an impact with that loan being offset. It is 4.10% and I’m aware I could prob do better.
    @bobbyj IP1 is CF+ but IP2 is not. Besides interest there is PM fees approx $2300, some general maintenance type things (last year approx $1700), strata fees approx 2k, water rates approx $1300, council rates approx $1600, insurance approx $400. Plus if a tenant vacates there is advertising, leasing fee etc,
    . We claim depreciation of approx $6600.
    We are considering selling IP2 as we have also had the same thoughts re the value going sideways- no point in losing money every year if we cannot sell for profit. Would be a shame as it is a lovely place and the location seriously is unbeatable.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Well that is about 0.70% higher than you investment loan. This means for every $100,000 you have in your PPOR offset it is costing you $700 per year extra as you could debt recycle and loan shuffle into your investments.
     
  17. LisaSimpson

    LisaSimpson Member

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    Thank you @Terry_w, do you mind explaining what you mean as I am unfamiliar with exactly how debt recycling works although I have heard of it.

    Btw I assume u meant the interest rate is 0.7% lower than the investment loans?
     
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  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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